International TradeResource Distribution & Specialization • A nation’s economic patterns are based on the factors of production it has. These may change over time • Specialization occurs when a narrow range of products are made • Results: • increased productivity & profit • economic interdependence—reliance on others for products not able to make • Ex: Japan trades for the raw materials it uses to produce automobiles. It then turns around & trades the automobiles for other goods.
Absolute & Comparative Advantages • Absolute advantage —nation’s ability to make product more efficiently • due to uneven distribution of production factors in different areas Comparative advantage—ability to produce at lower opportunity cost • absolute cost of product not important, just opportunity cost
How International Trade Affects the National Economy • Exports —goods & services produced in one country, sold in others • Imports—products produced in one country, purchased by another Costs & benefits • Varies by nation • Higher prices at home offset by more jobs & income • created by production that was expanded to meet the demand
Trade Barriers • Nations limit trade to protect domestic industries, which then leads to higher prices & economic retaliation by other nations. Over time, industries can only be saved by becoming competitive. • Trade barrier— law limiting free trade among nations • Import Quota — limits on the amount of a product that can be imported • Tariff—fee charged for goods brought in from another country • Voluntary export restraint— nation’s self-imposed limit on exports that is used to avoid a quota or tariff • Embargo— law that cuts most/all trade with a specific country
The Impact of Trade Barriers • Higher Prices • Trade barriers raise prices or keep them high • In 2000, U.S. & Japan set tariffs on South Korean semiconductor chips. Korean & domestic chip prices went up in U.S. & Japan • Trade Wars • Trade wars often result from disagreements over quotas/tariffs
Balance of Trade • Balance of trade—difference between value of imports & exports • Trade surplus—nation exports more than imports; favorable balance • Trade deficit—nation imports more than exports; unfavorable balance
Balance of Trade • U.S.-China Trade • Made U.S. top destination for Chinese exports (Most Favored Nation Status) • China has record trade surplus of $200 billion with U.S.
Modern Organizations to Combat Trade Barriers • Free-trade zones — areas where nations trade without protective tariffs • Customs unions — agreements that abolish trade barriers among members. They establish uniform tariffs for non-members
The European Union • established in 1993 • economic & political union; no trade barriers for members • 20% of global exports & imports • wants to remove all barriers to international trade • Euro — currency used by 12 of 27 member nations
NAFTA (North American Free Trade Agreement) • Established in 1994 • phased out trade barriers between Canada, Mexico & U.S. by 2009 • Has led to specialization, efficiency, expanded markets, new jobs • also competitive advantage over EU and Japan • All countries have had economic gain; trade has more than doubled
Other Regional Trade Groups • Mercosur, APEC • World Trade Organization—formed in 1995 by nations that follow GATT (General Agreement on Tariffs & Trade) – part of the UN • OPEC — Organization of Petroleum Exporting Countries • Cartel - group of producers that controls production, pricing & marketing of a product
Measuring the Value of Trade with Foreign Exchange • Trade needs way to set relative value of trading nations’ currencies • Foreign exchange market— where different currencies are bought & sold. It’s a network of major commercial, investment banks linking world economies • Foreign exchange rate— price of a currency in other currencies • fixed rate of exchange—nation’s currency constant in relation to others • flexible exchange rate—changes along with currency’s supply, demand
Analyzing Tariffs—Who Wins and Who Loses? • Background • The United States has had tariffs on sugar since the days of the early republic. • In recent WTO talks, less-developed countries have objected to the lack of market access for their goods and their price disadvantage. • What’s the Issue • How do the trade barriers set up by the U.S. government affect producers (both foreign and domestic) and consumers? • Thinking Economically • Which argument for protection does document C seem to make? Is this argument economically valid? Explain. • Is the difference in price shown in document B an unavoidable outcome of the program outlined in document A? Explain. • How does U.S. government intervention in the sugar industry limit the functioning of the economy as a free market? Use examples from the documents in your answer.
Reviewing Key Concepts • Explain the relationship between the terms in each of these pairs: • free-trade zone and customs union • EU and NAFTA • OPEC and cartel